What is the Blue Ocean Strategy? - History, Definition & Example

Instructor: Nick Chandler
Companies often compete with one another to gain shares in crowded markets, but what if there was a more effective way? In this lesson we look at a different approach: the Blue Ocean Strategy, which avoids competing and instead looks to create demand in untapped markets.

The History of the Blue of Ocean Strategy

When we think of competition between companies like Coke and Pepsi or Walmart and Costco, we think of competitors fighting to get the biggest share of the market. The companies try to outperform their rivals through more aggressive advertising, price wars, and other tactics. The Blue Ocean strategy is an entirely different approach. W. Chan Kim and Renee Mauborgne came up with the idea after they conducted a study of 150 strategic moves spanning 100 years and involving 30 industries. They found that the best option would be for companies to generate demand in a new market space rather than to compete for the same market space. They published these findings in a 2005 book called 'the Blue Ocean Strategy', which detailed what the strategy meant, examples of why other strategies are not sustainable, and examples of companies succeeding using their methods. Before the introduction of the Blue Sky Strategy, the existing theory on competition was headed by Michael Porter who claimed that successful businesses were either niche-players on a market or low-cost providers.

The essence of the Blue Ocean Strategy

If we think of all the companies in the world, they all have their own markets and compete in these markets with other rivals. The existing markets with competition are called red oceans. A good example of a red ocean market is the automotive and airline industries. Companies in these markets use similar tools such as advertising and pricing strategies to gain a greater market share. However, with lots of competitors in a market the struggle to gain greater share is even tougher, meaning companies spend more on advertising, marketing, improved customer service, or cut prices to attract more customers. All of these activities result in heightened competition and lower profits, meaning the chances for growth are slim, at best. The competition is so aggressive that it is referred to as cutthroat competition. The red ocean gets its name from the idea of oceans being red with blood from cutthroat competition.

Nowadays, red oceans seem typical of most industries, implying the prospects for growth are not great. So what other options could companies consider? The blue ocean refers to industries that have yet to be discovered by companies. Industries which don't exist yet also have markets without competitors. Rather than fighting for the same customers, in blue oceans the demand is created and a market emerges. The blue ocean approach is based upon the concept of value innovation which was also introduced by the authors of the Blue Ocean Strategy, Kim and Mauborgene. The concept seems to go against all current business rationales as the message is not to compete. Instead, companies look to find untapped markets through creating a new demand whilst at the same time they seek to keep costs low. In this way, the company gains new markets and the buyer gets value for money.

The Strategy Canvas

When a company decides to adopt a Blue Ocean strategy, it needs to find the blue oceans i.e. untapped markets. This might mean simply that if all the companies are competing on price, the best option may be to compete on quality. This would be the Blue Ocean strategy and might involve developing an existing product to create a premium brand or developing an entirely new product. Most products have a wide range of characteristics beyond just price and quality. The strategy canvas is a way of visualizing what characteristics of a product that customers are currently choosing in the market, or how competitors attract customers. If a company lists all the characteristics of a product and then highlights the ones which are currently used to compete for customers, any characteristics that are not highlighted are the untapped markets where demand can be created. In a nutshell, the strategy canvas helps a company to differentiate itself by choosing a different set of characteristics of the product upon which to compete. Let's imagine a company called MyCo wants to see visualize the characteristics so that a blue ocean strategy can be developed. The following example shows the strategic canvas for MyCo.

strategy canvas

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